The headline reads “Bank of America pays off $45 billion in TARP Money to The Government.” That’s the headline. Dig a little deeper, though, and you get the real story.
Why is the BofA paying off this money now, where is it getting the money to make the payoff, and how is this payoff being regarded by Wall Street? That’s the real story.
BoA is paying off TARP at a time it is still losing money. It also still has huge credit card loan exposure and home loan exposure, and is facing soaring new exposure with its commercial loans. Why in these circumstances pay off a huge chunk of debt that need not be paid off at this time?
The answer is that by doing so it allows the bank’s management to give itself huge bonuses, which they couldn’t do otherwise because of federal restrictions on the size of compensation at banks that owe TARP money. An even more pressing issue for this management involves attracting a new CEO. What best and brightest Wall Streeter these days will work for chump change, for compensation of just a few million a year and no near term mega-bonuses?
A management setting bank policy to accommodate its own comp and perks, and the comp and perks of a CEO it wishes to attract. A story in itself, of course, but so typical nowadays by itself it’s hardly worth a mention. But wait. We’re getting to the really interesting thing about this tale — the source of much of the funds for this TARP payback, and the market’s response to this funding source.
To help put together this $45 billion TARP payback, BofA is issuing $18.8 billion in new stock. It is diluting the value of its existing shares, in other words, for the right to pay its top management bigger compensation packages and a huge comp offering to a new CEO.
Interesting? Yes. But wait. We’re coming to the really interesting element in this tale. In a sane, truly free, unrigged stock market, a money losing company paying off debt it didn’t have to pay off now, and diluting its share pool to do so, would cause that company’s stock to plummet. BofA’s stock didn’t plummet this morning, however. It actually rose a whopping 7 percent.
This is the real story. Because it clearly shows that stock prices these days are no longer set by fundamental or even technical forces. The gaming of managements at major institutional investors and traders move the markets. And since these folks can’t think of any news more favorable than a company doing what BofA is doing, because this is exactly what these institutional investors and trading managements are themselves doing, they richly reward such behavior.
When the $45 billion man at BofA is finally named, the bank’s stock price will almost certainly soar again. And without doubt, the more they pay this person, the bigger the stock rise
I’ll end this post now. These days, after writing about Wall Street, I feel a need to quickly and thoroughly wash my hands…